Understanding Account Maintenance Requirements for Professionals and Businesses under the Income Tax Act

Maintenance of Accounts by Professionals and Businesses

The requirement for maintaining accounts by certain professionals and businesses is outlined in Section 44AA of the Income Tax Act, 1961, which was introduced by the Taxation Laws (Amendment) Act, 1975, effective from April 1, 1976 (Assessment Year 1976-77).

Legal Requirements for Professionals

According to Section 44AA(1) of the Income Tax Act, individuals carrying out the following professions must maintain accurate books of accounts and relevant documents to assist the Assessing Officer in determining their total income as per the provisions of this Act:

• Legal professionals
• Medical professionals
• Engineering professionals
• Architectural professionals
• Accountants
• Technical consultants
• Interior decorators
• Any other profession specified by the Board in the Official Gazette

Maintenance of Accounts for Businesses and Other Professions

Sub-section (2) outlines that individuals engaged in businesses or professions not covered under sub-section (1) must maintain accounts if they meet any of the following criteria:

1. Income Threshold: If their income from the business or profession exceeds ₹1,20,000 or if their sales, turnover, or gross receipts exceed ₹10,00,000 in any one of the three years immediately preceding the previous year.

2. Newly Established Businesses: If a business or profession is newly established during the previous year and is likely to generate income exceeding ₹1,20,000 or total sales, turnover, or gross receipts likely to exceed ₹10,00,000 during that previous year.

3. Lower Profits Under Specified Sections: If the profits and gains of the business are deemed under Section 44AE, Section 44BB, or Section 44BBB, and the individual claims income to be lower than those deemed profits during the previous year.

4. Exceeding Non-Taxable Income: If applicable sub-sections of Section 44AD apply and their income exceeds the non-taxable threshold during any previous year.

Proviso Updates Effective from April 1, 2018

The following amendments apply specifically to individuals and Hindu Undivided Families:

• The threshold of ₹1,20,000 has been increased to ₹2,50,000.
• The limit of ₹10,00,000 now stands at ₹25,00,000.

Board’s Authority

Sub-section (3) empowers the Board to enact rules regarding:

• The types of books of accounts and documents that must be maintained based on the nature of business or profession, including necessary inventories.

Sub-section (4) allows the Board to specify the retention period for the books of accounts and other documents mentioned in sub-sections (1) and (2).

Summary of Maintenance Requirements

• If the turnover is up to ₹1 crore, the taxpayer must declare a profit of 8% or more. If less, comprehensive books of accounts must be maintained for accurate income computation.
• For taxpayers under Section 44AD, if the specified conditions are not met, an audit of accounts is mandatory.
• Books must be maintained if turnover is up to ₹25,00,000 and profits exceed ₹2,50,000.
• If profits are up to ₹2,50,000 while turnover is over ₹25,00,000, records must also be kept.
• Taxpayers must demonstrate a net profit exceeding 8% of gross receipts; otherwise, complete books and a balance sheet must be submitted.

If turnover exceeds ₹1 crore, compliance with Section 44AB and Section 44AD is obligatory for businesses, and for professional receipts up to ₹50,00,000, adherence to Section 44ADA is required.